Analyst Note| Jaime M. Katz, CFA |
We plan to lower our $17.40 fair value estimate for no-moat Bed Bath & Beyond by around 20% after digesting dismal first-quarter results that included a 25% sales decline, a 620-basis-point impact from inventory obsolescence, and a c-suite shake up. A midteens price decline after the print renders shares undervalued, but we caution investors that it could take another two to three quarters before any signs of improvement arise. Commentary that there were issues in inventory, “that we will be working to actively resolve,” implies we are likely to see further inventory write-downs ahead, giving little hope that there is any potential for positive profitability over the near term. The adjusted quarterly EPS loss of $2.83 excludes $1.66 in charges for inventory and port fees, which are unlikely to be replicated, but is still miserably below the $0.05 in positive EPS the firm was able to capture in the year-ago period. The macroeconomic environment was noted as a key factor in purchasing pattern changes, and we surmise Bed Bath is set to be disproportionately impacted by its exposure to a mid- to low-income consumer base that is meaningfully impacted by inflation and acutely sensitive to price.